Oct 27, 2022 - Technology

Microsoft misses Xbox Game Pass subscriber target for second year

Video game screenshot of people in armor having a laser gunfight

Halo Infinite. Screenshot: Xbox/343 Industries

Subscriber growth for Microsoft's all-you-can-play Game Pass subscription service fell far short of an annual company target tied to CEO Satya Nadella's pay, according to a new financial filing.

Why it matters: The strength of Game Pass has long been used to measure Microsoft's success in disrupting the gaming industry.

  • It's also become central to discussions about whether regulators should approve the company's $69 billion bid for Call of Duty maker Activision Blizzard.

Details: Microsoft targeted a 73% growth rate for Game Pass for its fiscal year ending June 30, 2022, as part of performance incentives for Nadella and other top executives. But the service only achieved 28% growth.

  • That's two misses in a row. The company also failed to hit the executive pay Game Pass target last year, after exceeding it in 2020.
  • Microsoft doesn't publicize actual Game Pass subscriber target counts, but it said in the filing that its Xbox division has delivered "over 25 million Game Pass subscriptions."

Catch up quick: For a monthly fee, Game Pass grants Xbox console and PC subscribers access to hundreds of games, including new releases from Microsoft.

  • It's an alternative to the historical model of players paying in full for each new game they want.

Between the lines: In an interview yesterday at a Wall Street Journal tech conference, Microsoft's head of gaming, Phil Spencer, framed Game Pass as profitable but limited.

  • It accounts for 10%-15% of the company's content and services revenue (which includes gaming) and is "profitable for us," he said.
  • In remarks transcribed by The Verge, Spencer said Game Pass growth was "incredible" on PC but had slowed down on console, "mainly because at some point you’ve reached everybody on console that wants to subscribe."
  • Game Pass' growth might also be stalled due to a lack of available major releases. In the last two years, Microsoft has published few big exclusive games, especially compared to rivals Sony and Nintendo — neither of which bundle new releases into their subscription offerings.

The intrigue: The U.K.'s Competition & Markets Authority has cited Game Pass as a point of concern regarding whether it'll approve Microsoft's Activision deal.

  • In a 76-page initial report, it said the deal gives rise "to a realistic prospect of a substantial lessening of competition" in "multi-game subscription services," should Microsoft put Call of Duty on Game Pass.
  • The idea is that offering the popular series — which often accounts for any given year's best or second-best-selling game — could make Game Pass irresistible and Microsoft problematically unstoppable.

The other side: Microsoft has denied such a move would reach an anti-competitive threshold requiring blockage of the deal, saying PlayStation could always counter by putting better exclusives on its service — or even offer Game Pass on PlayStation.

  • CMA rejection could kill the bid, though its final decision isn't expected until next year.

A pivotal metric for Microsoft: Game Pass growth is the only gaming-related performance target in the executive pay package.

  • Other goals involve Microsoft Cloud Revenue, Teams usage and LinkedIn Sessions.
  • The Game Pass metric was weighted more heavily this year than in previous years and was tied to a potential payout to Nadella of more than $37 million worth of stock.
  • The miss on that stat probably wasn't too painful. For the 12 months ending June 30, 2022, Nadella was awarded $55 million in cash and stock compensation.

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